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Peoplesoft hit by lawsuits following SEC review

by Dennis Howlett

Peoplesoft has been peppered with class action lawsuits, which allege malpractice and misrepresentation in handling the spin off of its Momentum research and development arm and in its acquisitions of Intrepid and Pman.

The move follows the enterprise resource applications supplier?s announcement at the end of last month that its fourth quarter figures were below analysts? expectations and that it intended to axe six per cent of its workforce.

The firm also said it did not expect to return to significant growth until the second half of this fiscal year (see VNU Newswire, 29 January, 1999).

As a result, while class action suits are common in the life of publicly quoted companies, the current raft filed against Peoplesoft will do nothing to help its reputation or that of Dave Duffield, the company?s chief executive (CEO), or Ron Codd, former chief financial officer (CFO).

This is particularly poignant at a time when Peoplesoft needs to maintain focus to fight stiff competition from arch rivals, SAP and Oracle.

To make matters worse, on filing its latest results, Peoplesoft also admitted it had received correspondence from the Securities and Exchange Commission (SEC), which indicated it was reviewing the firm?s 1996 Pman acquisition and its 1998 Intrepid purchase.

A new interpretation of existing SEC rules covering acquisitions may require Peoplesoft?s 1996, 1997 and 1998 accounts to be restated. This means that profits for these periods could end up lower than previously reported because of the new way of accounting for inprocess acquired research and development.

PeopleSoft is one of about 150 companies that the SEC has decided to review, but since stock prices partially reflect judgments made on profit potential, which are based on financial press releases, lawyers claim the supplier?s share price was artificially inflated.

This has sparked a row between the SEC and Peoplesoft. Mark Lane, Peoplesoft?s vice president of international marketing, says: "Our external auditors examined and approved our financial statements for the years in question and we?re satisfied Peoplesoft had operated within the then prevailing SEC guidelines."

But it is not as simple as that.

Chuck Phillips, senior analyst at Morgan Stanley, says: "The rules haven?t been changed, but a new regulator is interpreting [the rules] in a stricter way."

And it is this fact that is providing lawyers with the fuel to say that Peoplesoft has misrepresented itself to investors.

Sources close to Peoplesoft?s key management say they are ?extremely upset? at the allegations, especially since analysts had previously admired Codd?s candour in his dealings with Wall Street.

Al Castino, Peoplesoft?s current CFO, says: "It?s common for auditors to be involved in the valuation of inprocess research costs and that was the case here. We calculate the difference it might make to 1998 results is something like half a penny to a penny."

As regards the situation with Momentum, he adds: "We cleared this in advance with the SEC."

Elsewhere, it is understood that companies affected by the SEC?s new interpretation of the rules are considering taking legal action against it on the grounds that it is unfair because it is retroactive.

Castino explains: "We don?t agree with retro accounting under the new interpretation. There?s a lot of pressure being put on the SEC at this time - our industry group is pushing back hard on this one."

The SEC refused to comment.

But the statement of claim from litigant, Dennis J Johnson, for example, ties the Intrepid and Momentum deals to forecasts, subsequent results, and insider trades.

Johnson also alleges that Peoplesoft executives sold out at a time when they knew the share price could be adversely affected, but made substantial profits in the process.

Barrack, Rodos and Bacine, on the other hand, allege that insiders benefited to the tune of $232 million in share sales during the period covered by the lawsuits.

The suit claims that Dave Duffield, PeopleSoft?s CEO, benefited either directly or indirectly to the tune of $162.4 million, while his brother Al netted $12.8 million despite knowing the company?s performance would decline.

A further claim alleges that Cyril Yansouni, a PeopleSoft board member, who was at Informix when it was implicated in a $300 million accounting irregularity, also benefited from share dealing.

Philipps believes, however, that the latest SEC requirement, which triggered the lawsuits, will "fizzle out".